Relevant and even prescient commentary on news, politics and the economy.

Cindy Hyde-Smith Says She Never Lost Faith in Mississippi

Some humor, sarcasm, and disappointment.

JACKSON, MISSISSIPPI (The Borowitz Report)—Celebrating her election victory on Tuesday night, U.S. Senator Cindy Hyde-Smith said that, despite predictions that her state was ready to turn the page on its shameful past, “I never lost faith in Mississippi’s racists.”

“For weeks, we’ve been hearing national pundits say that Mississippi was ready to enter the twenty-first century,” Hyde-Smith told a crowd of supporters at her victory rally. “Tonight, with your help, we proved them wrong.”

Hyde-Smith said that, despite the media’s unearthing of a cavalcade of embarrassing comments and actions from her past, “I never doubted that, at the end of the day, the people of Mississippi would listen to the racist voices in their heads.”

Choking back tears, Hyde-Smith thanked her supporters for honoring Mississippi’s storied heritage of hatred and cruelty.

“Mississippi voters do not want to tear down the relics of our Confederate past,” she said. “As such a relic, I am eternally grateful.”

Exit polls showed that Hyde-Smith performed extremely well with voters who described themselves as bigots, and dominated among those who could not correctly spell “Mississippi.”

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Q3 corporate profits increase

Q3 corporate profits increase

Third quarter corporate profits were released as part of the first revision of GDP this morning.  Since corporate profits deflated by unit labor costs are a long leading indicator, let’s take a look.

Here is the raw corporate profits table released by the Bureau of Economic Analysis:

Lines #3 and #11 are the two we are interested in. Both measure corporate profits after tax, with and without inventory adjustments. The first increased quarter over quarter by +3.3%; the second by +0.7%. Note that this q/q result (as opposed to YoY) is not affected by the tax cut enacted last December.

A few weeks ago, unit labor costs were reported to have increased by +0.3% in the third quarter.

As a result, regardless of which way we measure, corporate profits increased in Q3.

Between increased corporate profits and loose lending, as reflected in the Senior Loan Officer Survey several weeks ago, the producer side of the economy continued to do very well through September.  Although several other long leading indicators, most importantly interest rates and housing turned negative by the end of September, this is enough to confirm that, left to its own devices, the economy should not roll over into recession in the first three quarters of next year.

The “left to its own devices” part in the above sentence, however, is an important qualifier right now, because it does not include the effect of Trump’s tariffs. This is an ongoing and generally haphazard public policy intervention into the market, and the early results, as measured by rail traffic in particular, have been negative. It is simply impossible for me to do anything more than guess how much that might change the conclusion. At the most, I would hazard that Trump will continue to add tariffs, and that it *could* take a weak economy, such as I already foresee for next summer, and tip it into contraction.

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October new home sales plummet — but take it with a big grain of salt

October new home sales plummet — but take it with a big grain of salt

As you may have already read elsewhere, new home sales plunged -8.9% in October to the seasonally adjusted annual rate of 544,000. Here’s the accompanying graph:

BUT … take this with a big grain of salt. The reason I rely on building permits, espectially single family permits, is their much smaller volatility, and *much* smaller rate of revisions.

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Janet Yellen “Not Tall Enough”

Janet Yellen “Not Tall Enough”

So said Donald Trump on several occasions in connection with possibly appointing her as Fed Chair, according to an article in today’s Washington Post by Philip Rucker, John Dawsey, and Damian Paletta.  This article, along with several others, mostly covered the 20 minute interview these three had with Trump in the Oval Office.  Most of the news was wxs expected: on MbS still “maybe he did and maybe he didn’t” on his role in the Khashoggi murder; “i don’t see it” regarding evidence of a human role in global warming presented in the recently released climate change report, and California forest fires still due to poor forest management (with Interior Sec under investigation Ryan Zinke weighing in on that one about the importance of good forest management).  No, the top story was about the economy.

So Trump is blaming GM’s impending layoff of 15,000 workers on the Fed raising interest rates, no role for his steel tariffs.  Janet Yellen should probably grateful she is not in the firing line.  It is Jerome (Jay) Powell who is, with Trump declaring “So far, I’m not even a little bit happy with my selection of Jay.  Not even a little bit. And I’m not blaming anybody, but I’m just telling you I think that the fed is way off-base with what they are doing.”

Now arguably the Fed is being too vigorous about raising interest rates, and they may well slow down or even halt this if the rumblings of growth slowing become louder.  That said, if Yellen had been reappointed probably we would have seen interest rates this year, if possibly maybe not quite as rapidly as we have seen (or would have with some hawk outsider many Congressional Republicans were pushing like Jon Taylor).  But the Fed is much more of a group operation than many realize, especially given that the Chairs for quite some time have sought more or less consensus decisions, even as they are often scattered dissidents making public noises.  And this consensus has a strong element coming from the staff and their models, wirh all of this building in a lot of momentum.  Once the Fed gets itself into doing something, like deciding on the string of interest rates they have been doing, it is hard to undo that.

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Trump More Seriously Kowtows To MBS

Trump More Seriously Kowtows To MBS

 We have already seen the spectacle of Trump simply dismissing the reported CIA conclusion that Saudi Crown Prince Mohammed bin Salman (MbS) ordered the gruesome murder and dismemberment of journalist Jamal Khashoggi (“Maybe he did, maybe he didn’t”)  He has put forward silly excuses for this: low oil prices! (nonexistent) hundreds of billions of dollars of arms deals!  Key to the anti-Iranian coalition!  Oh, and also supposedly key to Israeli-Palestinian peace, this last especially ridiculous since Trump supported moving the US embassy to Jerusalem, wirh Saudi King Salman himself intervening to denounce that.  Of course most of us suspect that his willingness to spout off on all this stuff has a lot to do with money personally flowing to him and Jared Kushner, quite aside from the sword dance and orb and all that stuff they showered him with on his first foreign trip as president.  But now we are seeing a new and more disgusting level of kowtowing to MbS and the Saudis.

This has to do with the war in Yemen.  Juan Cole reports that the US is blocking a UN Security Council resolution proposed by Britain and supposedly supported by all the other nations in it for a ceasefire around the Yemeni port of Hodeida.  This is the port through which most supplies go to the Houthi-controlled areas in the northern part of Yemen, including the nominal capital, Sana’a.  The official government, now operating out of Aden to the south, the former capiral of the formerly separate South Yemen, a Sunni govenment backed by the Saudi and UAE, has been attacking Hodeida, apparently hoping to conquer it and cut off supplies to the Houthis with the intention to starve them into submission.  Even though many in the US DOD and Congress, including many GOP senators, have become increasingly unhappy with the Saudi bombing campaign against the Houthis, and the US has apparently ceased aiding the refueling of the Saudi bombers, although apparently they do not need the US assistance on this.  Reportedly we are still providing crucial intel in support of this bombing campaign, which has led to many civilian deaths, and the population is also reportedly on the verge of famine, as well as suffering from a cholera epidemic.

The UNSC proposal is for a ceasefire around Hodeida, but MbS reportedly “threw a fit” when he learned of this proposal, which apparently includes wording that is very supportive of the Saudi-backed government in Yemen and critical of the Houthis. But MbS wants no halt to the campaign to conquer Hodeida and starve the Houthis and those in their territories.  So, Trump has kowtowed to this “fit,” and is apparently blocking the proposal, despite it coming from the British and containing anti-Houthi language.  There have been reports that MbS has said that he has Jared Kushner “in his pocket,” but it is now screamingly clear that this nauseating murderer also has President Trump “in his pocket” as well.

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Aetna and CVS Merge

Nearly one year after agreeing to merge in a bid to reinvent healthcare for Americans, CVS Health and Aetna sealed the deal on Wednesday, bringing together one of the nation’s largest pharmacy chains and one of the largest health insurers.

CVS Health President and CEO Larry Merlo: “Today marks the start of a new day in health care and a transformative moment for our company and our industry. By delivering the combined capabilities of our two leading organizations, we will transform the consumer health experience and build healthier communities through a new innovative health care model that is local, easier to use, less expensive and puts consumers at the center of their care.”

Despite warnings from provider groups, patient advocates, economists, and antitrust experts of the combination harming competition and patients, the $69 billion merger scored approval from U.S. Justice Department antitrust enforcers and insurance regulators in 28 states. On Monday and surprisingly for me those regulators who always appear to be going after someone of some business, New York regulators became the last to sign off on the deal.

This is another example of the healthcare enterprise, big business, etc. getting ready for government sponsored single payer, Medicare-for-all, public option, etc. (whatever you wish to call it) having the power to negotiate pricing/costs of delivered healthcare if legislators actually decide to have such power. Otherwise, it becomes a simple cost shift to the government which will result in higher taxes and uncontrolled costs for healthcare which can be had for far less cost in our equivalent European neighbors countries. Other bloggers and many readers here and other places are used to calling out for these popular memes without definition.

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CSX Slowly being Disassembled by Mantle Ridge Hedge Fund

CSX connects most major U.S. cities east of the Mississippi River. Since 2017, the railroad has laid off 6,000 employees, cut back on capital spending, and slashed the number of trains it runs and discontinued hundreds of the routes it serves.

Together CSX and Union Pacific serve major U.S. cities west of the Mississippi River and together they discontinued service on 197 out of 301 cross-country routes that the two rail giants partnered on in September 2017.

The results of these actions leaves shippers who want to send goods across the country no “direct” means to send a container by rail from Houston to Baltimore. Instead, CSX will take the container as far as Chambersburg, Penn. And the rest of the way will be by a container trucker going the remaining 77 miles to Baltimore. The same exists if the shipper uses Norfolk Southern. Norfolk will take the container only as far as Harrisburg, Penn. And the container will be transferred to a container trucker for the balance of the 76 miles to Baltimore.

Why would CSX owners do this when the need still exists? The cost cutting brings short-term profits and a soaring stock price. Between the beginning of 2017 and the end of this year’s third quarter, CSX labor expenses declined by 18% and the value of its stock rose by 106 percent. Rather than increase the price on its route, CSX can maximize profits and minimize capital and maintenance costs by cutting service in the aggregate. The cut in Labor cost is just an add on when compared to the cuts in Overhead costs.

Side Note: So much for common carrier and public utility laws. “The term utilities can refer to the set of services provided by these organizations consumed by the public: Coal, electricity, natural gas, water, sewage, telephone, and transportation. Broadband internet services (both fixed-line and mobile) are increasingly being included within the definition” while a “common carrier offers its services to the general public under license or authority provided by a regulatory body. The regulatory body has usually been granted ‘ministerial authority’ by the legislation that created it. The regulatory body may create, interpret, and enforce its regulations upon the common carrier (subject to judicial review) with independence and finality, as long as it acts within the bounds of the enabling legislation.”

E. Hunter Harrison is the man who figured out how-to pump-up profits by cutting service. Over the course of his career at the Illinois Central, Canadian National, and Canadian Pacific Railways; Harrison implemented his trademark program: “precision scheduled railroading.” Besides cutting capital (engines, cars, etc.) Overhead (maintenance of equipment, facilities rail beds, costs associated with Labor, etc.) and Labor costs; precision scheduled railroading means less service, fewer and longer trains, fewer routes, and ignoring some major cities.

Side Note: This is the same type of cuts in service many politicians and competitors of the USPS are pushing for today. Railways like the postal service are utilities and are vital to the community. The purpose of both mail and railroads was to provide a service as a public utility. Railroads being granted exclusivity for certain routes and governed by common carrier law. Someone is purposely asleep at the switch and abating the destruction of infrastructure.

Why would CSX cut service drastically? Hedge fund Mantle Ridge and founder and CEO Paul Hilal. Mantle Ridge had and still has only one investment, an initial $1.2 billion stake in CSX stock purchased in late 2016. The $1.2 billion is now worth nearly $3 billion as of the last quarter. In January 2017 with Mantle Ridge’s investment, Hilal pushed CSX to hire his partner Harrison and implement precision schedule railroading (nothing to do with schedules and more to do with providing service).

CSX agreed to Hilal’s demands. Shareholders salivated at the thought of Harrison boosting CSX’s profits right into their pockets and showed large support for Harrison’s leadership at CSX. Harrison saying that “shareholders took a much more active role than I’ve ever seen before. They wanted change.”

Of course, they wanted change at CSX for short term profits or rent taking. They will leave CSX a shadow of its formal self. The loss of the necessary infrastructure promoting the transportation of goods in the US will be born by its citizens in increased costs and impinge upon national security.

On a similar note and action . . . October 15, 2018 Sears faced a deadline for payment of $134 million on its debt. It didn’t have the money, so it filed for protection from its creditors. Eddie Lampert — the largest shareholder in the company, with nearly half its shares — stepped down as CEO. Another corporate pirate who will strip the assets of the company and leave Sears a shell of its former self.

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When White America Becomes a Minority

Announcement of a Looming White Minority Makes Demographers Nervous.” NYT’s article makes this announcement of White America becoming a minority in the 2040’s like it is new news. It is not. Back in 2006, I exchanged emails with Joel Garreau about the same topic in his article 300 Million and Counting. Joel concentrated on the arrival of immigrants to the country being good news as it keeps our labor force younger than other countries such as Germany, Russia, etc.

One AB commenter asked whether it makes sense to have an educated populace if they can not pay back the cost of an education. It does makes sense to educate the population as they are better equipped to take on the requirements of the economy whether it is manufacturing or service based. Burdensome student debt in which excessive interest payment resulting from economic hardship being a precursor to paying loan principal only aggravates the problem of debt shackling the borrower to a longer period of time of debt servitude before becoming productive and contributing to society. It behooves the nation to minimize the costs associated with getting an education with low loan interest rates, forgiveness over time, and complete eradication.

A younger work force coupled with educational skills pays off in productivity gains at many different levels.

Joel Garreau also talked of immigration in 2006 in a positive sense:

“One fortuitous result of the enormous wave of immigrants coming to the United States is that the median age here is only a little over 35, one of the lowest among the world’s more developed countries. This country also has the most productive population per person of any country on the planet—no matter how you measure it, and especially compared with Japan and the members of the European Union.”

It has changed somewhat with the 2008 recession and the slack in the Labor Force amongst the prime age.

NYT approaches the issue in a nervous manner.

“The presentation of the data disturbed Kenneth Prewitt, a former Census Bureau director, who saw it while looking through a government report. The graphic made demographic change look like a zero-sum game that white Americans were losing, he thought, and could provoke a political backlash.”

Expectations? White nationalists worried about losing racial dominance. Progressives envisioned greater political power from greater diversity and a white minority. Others look to the immigration of new people as a way to fill the gap left by retiring baby-boomers.

With each arrival of a new class of immigrant, there has always been a backlash as to how to categorize them. In this instance, the change coming is already here, has been for a couple of decades, and will come to pass in the 2040s well after baby-boomers have passed. Whether politicians or white America resists it, it will not matter as this change will occur. What will matter is whether we give them the proper tools now to be productive later.

As Charles King, a political science professor at Georgetown University stated; “The closer you get to social power, the closer you get to whiteness.” King is the author of a new book on Franz Boas, the early 20th-century anthropologist who argued against theories of racial difference. The one group that was never allowed to cross the line into whiteness was African-Americans and the long-term legacy of slavery.

Just an opinion, when Mexicans, African-Americans, and other groups were and are in the minority, white America didn’t care. Now the status of white America is changing, they are waking up to it, and they care.

I urge you to read both articles.

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Passed on the Romaine Salad This Year

My wife was in charge of making the salad for Thanksgiving. For her easily done as she makes her own Italian dressing. I bought enough Romaine Hearts to feed 20 people. On Wednesday, we pitched them all as CDC said not to eat any Romaine as it was contaminated with E. Coli. We moved on to Spinach and Arugula.

It is not the first-time leafy vegetables have been removed from the grocery shelf and the dinner table. Indeed, if you glance at the attached chart, it has happened frequently over the years. Since 2006, there has been at least one outbreak of E. Coli yearly caused by leafy vegetables.

The Center for Investigative Reporting on its website Reveal was one of the first to break the story of why it has become hazardous to eat vegetables in the US. “5 people died from eating lettuce, but Trump’s FDA still won’t make farms test water for bacteria.”

Congress legislated actions to be taken in 2011 after several out breaks of E. Coli and the resulting illness. The testing of the water used to irrigate the fields growing the plants was to start in 2018. Six months before people were sickened by the contaminated Romaine, in response to pressure from the farm industry, and Trump’s mandate to eliminate regulations, the FDA delayed the water-testing rules for at least four years.

This particular outbreak originated in Yuma Arizona and is believed to be from irrigation water which is typically a prime source of food contamination and foodborne illnesses. When livestock feces flow into and contaminates a creek, the tainted water can seep into wells or is sprayed onto produce which is then harvested, processed, and sold at stores and restaurants. Salad leafy greens are particularly vulnerable and they are often eaten raw and can harbor bacteria when torn. In 2006, most California and Arizona growers of leafy greens signed agreements to voluntarily test irrigated water which minimizes the risk of contamination.

Farm groups contend the testing of water is too expensive. Some farmers contend the whole thing is an overblown attempt to exert government power on them. Postponing the water-testing rules would save growers $12 million per year. It would also cost consumers $108 million per year in medical expenses, according to an FDA analysis.

Go Figure . . .

Reveal: “5 people died from eating lettuce, but Trump’s FDA still won’t make farms test water for bacteria.” The Center for Investigative Reporting.

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U.S. Interest Rates and Global Banking in Emerging Market Economies

by Joseph Joyce

U.S. Interest Rates and Global Banking in Emerging Market Economies

The spillover effects of changes in U.S. interest rates are widely recognized (see here and  here). An increase in rates, for example, raises the cost of dollar-denominated financing outside the U.S., which has grown in recent years, while an appreciation of the dollar makes such debt even more expensive to service and refinance. The emerging markets are among the nations adversely affected by the rise in U.S. interest rates. Several recent research papers have shown how global bank lending in these economies is affected.

Stefan Avdjiev, Cathérine Koch, Patrick McGuire and Goetz von Peter of the Bank for International Settlements investigate the impact of a change in U.S. monetary policy on cross-border lending by global banks in their paper, “Transmission of Monetary Policy through Global Banks: Whose Policy Matters?”, BIS Working Paper no. 745. In their analysis they also investigate the effect of changes in the policy stance of the central banks of both the country of the borrower as well as the home country of the lending bank. They use data on cross-border claims denominated in U.S. dollars held by international banks in 32 lender countries on borrowers in 55 countries over the period of 2000-2016.

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